For several years now, wireless chip giant Qualcomm (NASDAQ:QCOM) has relied on Samsung's (NASDAQOTH:SSNLF) contract chip manufacturing division to build its high-end Snapdragon 800-series smartphone processors. Taiwan Semiconductor Manufacturing Company (NYSE:TSM) had previously manufactured those chips.

However, rumors have been swirling for quite a while now that Qualcomm's next 800-series Snapdragon processor, which is likely to be branded the Snapdragon 855, would be manufactured by TSMC using its 7-nanometer chip technology.

Qualcomm's Snapdragon 845 platform broken down into sub-units.

Image source: Qualcomm.

According to DIGITIMES, which cites "industry sources," TSMC will, in fact, be manufacturing Qualcomm's next 800-series Snapdragon chip. Let's go over why this makes sense and what it means for TSMC, Qualcomm, and Samsung.

Samsung is behind

During TSMC's earnings conference call on April 19, company CEO C.C. Wei said that its 7-nanometer technology was already in mass production. By contrast, Samsung has yet to begin mass production of chips using its own 7-nanonmeter LPP technology.

While TSMC's technology uses traditional immersion lithography tools to build its 7-nanometer chips, Samsung's 7-nanometer LPP technology relies heavily on extreme ultraviolet, or EUV, lithography tools for critical manufacturing steps.

According to microprocessor analyst David Kanter, EUV lithography tools are "definitely not" in shape for high volume manufacturing. Indeed, according to Kanter, Samsung's yield rates on SRAM memory cells built using 7LPP are "very low," so Samsung's 7LPP technology is likely still a ways off from being ready for prime time -- it probably won't be ready for mass production by the end of the year at this rate, anyway, to support Qualcomm's product launch ambitions. 

By contrast, TSMC is in mass production on its own 7-nanometer technology right now, which suggests that the company is able to build chips using this technology at reasonable yield rates.

Given that Samsung's 7-nanometer LPP technology looks a ways off from mass production and TSMC's 7-nanometer technology has been in volume production for several months now, it's not surprising to see Qualcomm return to TSMC for the next high-end Snapdragon.

Implications for Qualcomm, Samsung, and TSMC

The implications here for Qualcomm are simple -- thanks to its ability to pick the best chip manufacturer for the job, it'll be able to bring out its next-generation premium Snapdragon processors on time to stay competitive in the marketplace. This is all good news for Qualcomm.

For Samsung, this is obviously a negative -- Qualcomm is Samsung's biggest customer for leading-edge chip manufacturing technology outside of, perhaps, Samsung's internal chip development teams, so this shift is likely to lead to a meaningful drop in Samsung's contract chip manufacturing revenues.

That said, it's worth keeping in mind that Samsung's revenue from contract chip manufacturing is relatively small compared to the rest of its semiconductor business. Samsung's semiconductor business, which generates sales primarily from sales of memory products like DRAM and NAND flash, generated $66.8 billion in 2017 with about $54.2 billion of that coming from memory product shipments.

This means that Samsung's entire nonmemory chip business -- which includes Samsung's Exynos processor sales, contract chip manufacturing revenue, image sensor sales, and other chip component sales -- came in at just $12.6 billion for the year. I suspect that Snapdragon 800-series production is just one component of that revenue, which, in itself, is just a small part of Samsung's total chip business revenue.

So, Samsung as a whole should be fine, even if its contract chip manufacturing arm takes a hit from this seemingly temporary customer defection. Moreover, Qualcomm has already publicly said that it will be using Samsung's 7-nanometer LPP technology for future 5G chips, so the pain for Samsung's contract chip manufacturing business should be temporary.

For TSMC, this looks to me like a temporary windfall -- the company should benefit from winning the upcoming premium Snapdragon processor manufacturing business, but given Qualcomm's public statements about how it'll use Samsung's technology for future chips, that revenue and profit boost should be temporary.

All told, from a stock perspective, this shift doesn't seem like that big of a deal as I suspect Qualcomm will ultimately shift its business back to Samsung as soon as it makes sense to.

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.